Monday, December 29, 2008

Debt forgiveness, inflation and welching

In a simple handwave estimate, one might say that the debt will have to be discounted by at least half. That includes inflation and selective defaults...

... something has got to give. The givers will most likely be all holders of US financial assets, responsible middle class savers, and a disproportionate share of foreign holders of US debt.

While the debtors hold the means of payment in dollars and the power to decide who gets paid, where do you think the most likely impact will be felt?

I give below the US Treasury's data on foreign holdings of their government securities as at October 2008, but I also reinterpret it in the light of each country's GDP, to show relative potential impact (please click on image to enlarge).Mind you, even a complete repudiation would only take care of $3 trillion. Funny how not so long ago, $1 trillion seemed a high-end estimate of the damage, and now it's something like seven times that. And that still leaves a long haul to get to Hodges' $53 tn - equivalent to, what, one year's global GDP?

2 comments:

Anonymous
said...

I entirely agree that at least 50% will need to be "written off" - probably by printing money. In the UK it could be as much as 2/3rds. I don't have too much sympathy with those holding the debts- they have participated in a market for debt where they hoped to get rich quick, often by taking advantage of the foolishness of others. Sure, that also means my own saving and assetts will get hurt. But since my house has gained in value 3x since I bought it on the basis of other people being forced to compete in debt fuelled markets, was I really entitled to expect that it would last forever? My house will slump back towards the price I paid for it - but the advantage will be that now I no longer have a mortgage to pay and can rest easy.